The increase in US bond yields slowed down, which translated into a significant depreciation of the dollar. Simultaneously, the US S&P 500 index returned to its all-time highs, and the technology sector, previously under pressure from the debt market, also took a breather. In short: the risk appetite is booming, and the environment has become much more favourable for emerging markets currencies and assets.
The situation looks a bit as if at the end of the quarter, the fear of a pandemic disappeared, and such advantages as a rapid course of the vaccination program no longer mattered. The main beneficiary of the global economic rebound and the return of inflation were to be the emerging markets currencies, including the euro among the G-10, which was supported, among others, by the characteristics of the European stock market.
Euro trades bid once again
After all, this is nothing new. The common currency entered the year as an investor favourite but lost that status along the way due to the epidemic situation and the reshuffling of the government bond market. There are many indications that the low levels of the EUR/USD exchange rate at the start acted as a magnet for capital and investment ideas from a few months ago are undergoing a revival. Needless to say, the sudden demand for the euro also translated into a turnaround in the common currency against the pound. The EUR/GBP pair declines were one of the stronger trends, which had its basis in a gigantic difference in vaccination rate. The rate hike acts as an accelerating snowball and pushes the pound into the defensive territory, also against the zloty and other currencies.
The signal that the recovery is about to start spreading worldwide comes from a series of data from the USA. The industry is in excellent shape everywhere, but the strongest ever sentiment in the services sector and speedy recovery of jobs lost during the pandemic are signs that the rapid economic recovery has already begun. Given such circumstances, we believe the dollar will perform poorly in this environment, and we continue to view its first-quarter dominance as a rebound from the 2020 downturn. Our forecasts assume that the EUR/USD pair will be around 1.25 at the end of the year. Fear of a third wave of the pandemic seems to be waning as there are indications that it peaked before Easter. Also, the retreat from the dollar – while expected – may prove premature. The euro has scarcely any real arguments behind it and offers only promises that do not always materialise as the last months have shown.